Breakout

Debt Ceiling Theatrics Could Spark 10% Sell-Off

Jeff Macke
Breakout

Unless the debt ceiling is raised the U.S. will run out of cash sometime between February 15th and the middle of March. If that fuzzy deadline doesn't make you tremble, you're not alone. The stock market doesn't seem to care much either. Less than three weeks into the year stocks are up more than 3% on the heels of a very strong 2012.

If the fiscal cliff didn't matter to stocks and the August 2011 debt ceiling debacle was just a buying opportunity, the question for investors is whether or not the Next Big Government Crisis is a reason to adjust their portfolios.

Hugh Johnson of Johnson Advisors says the debate itself, along with the potential for spending cuts deep enough to cut economic growth, are reasons for concern. In the context of what he thinks will be 1 - 2% growth, we could easily edge into a recession in Q1 and the back half of the year. The start of a recession is typically not a good environment for stocks.

Johnson says the smart play for traders going into the heart of the debate next month is to be on the short side of the market. For those less inclined to jump in and out of the tape, Johnson suggests dragging their feet on buying stocks unless or until stocks pullback around 10%.

Johnson's 2013 outlook is "barely positive" from here. With stocks at fair value he's going to need a 10% pullback to pique his interest. He thinks the "theatrics of the debt ceiling" may play out in a way that gives him that buying opportunity.

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